Fraudulent Disbursements – Billing Schemes and Payroll Schemes

November 15, 2016

More in the series on getting to know the fraud tree better. To get a better sense of where we are on the fraud tree and which branch we are talking about in this newsletter, please see the entire fraud tree at http://www.acfe.com/fraud-tree.aspx.

Misappropriating cash through fraudulent disbursements is a sizable portion of the fraud tree because there is a lot of room for creativity. See an illustration of the fraud tree here: http://www.acfe.com/fraud-tree.aspx In this newsletter, we will cover billing schemes & payroll schemes. In future newsletters we will cover expense reimbursement schemes, check tampering, and register disbursements. Five creative categories under fraudulent disbursements in all!

With fraudulent disbursements, the fraudster causes an organization to disburse funds through some trick or device such as submitting false invoices or forging checks. The disbursement is often disguised as a legitimate business activity so that it can slide through the accounting system undetected by controls.

And with these sorts of schemes, the fraudster is usually caught when they get too bold or too greedy. If they would just keep it small, they could supplement their income for decades!

Billing Schemes

Here the fraudster creates a valid looking bill and causes the organization to issue payment for the fraudster’s personal benefit. The Association of Certified Fraud Examiners classifies billing schemes into three categories:

Shell companies

Non-accomplice vendors

Personal purchases

Shell Companies

In this creative scenario, the fraudster creates a fake company that has a valid sounding name and then sends checks from the victim company to their fake, or shell, company.

In my hometown, LouAnne Aponte stole over $800,000 from a large not-for-profit, Family Connections, for which she was the executive director. For six years she forged a well-known local CPA firm’s name on audit reports to avoid questioning by auditors and to satisfy federal grant requirements.

In March 1993, Aponte formed a business named Excite and Challenge, and then paid Excite and Challenge from Family Connections funds. She used the money to pay her mortgage for a home in a tony Austin neighborhood and bought herself a convertible Mercedes.

For a decade LouAnne Aponte also volunteered as the treasurer for the Texas Association of Child Care Resources and Referral Agencies. Aponte was accused of stealing over $100,000 from that organization.

Aponte had a history of theft dating back to the 1980s when she stole about $60,000 from two employers. In 1987, she served only four months of a four-year prison sentence for her crimes. Unaware of Aponte’s past, the nonprofit Austin Families hired Aponte in 1990 when she was still on parole.

Having served only two and a half years of her 25-year sentence for the crimes against Family Connections, Aponte was up for parole in May 2013.[1]

Straw students are like shell companies, aren’t they?

Creating fake students has always been a popular scam when it comes to milking money out of student financial aid programs. When you actually see students in a classroom in college environments, it is hard to keep a scammer from succeeding – but how do you verify online students?

Between 2006 and 2009, Trenda Halton defrauded Rio Salada College in Arizona for over a half a million dollars. Having discovered how to defraud the registration system of Rio Salado College, Halton worked with four accomplices to create 136 “straw” students.

In her scheme, she recruited “straw” students who prepared and filed bogus admissions applications, financial aid applications, and Pell Grant applications in the students’ names. The financial-aid recipients received aid money after Rio Salada deducted tuition.

Halton’s cover was blown when a Rio Salado employee noticed that the applications all had the same handwriting and the students were enrolled in the same classes. In 2009, Halton was indicted with 64 other defendants and charged with offenses such as conspiracy, mail fraud, financial aid fraud, and making false statements in connection with financial aid.

Rio Salada’s small distance learning college was a prime digital target for Halton. Other colleges that have been victimized by online financial-aid fraudsters include the University of Phoenix’s Axia College, Michigan’s Lansing Community College, and Texas’ Dallas County Community College.[2]

Non-Accomplice Vendors

My small business has several names, and I have been married 15 times. OK, OK, I have wed only twice. But I have three last names! And the bank will take any check from me using any of my last names or business names.

A banker in one of my classes told me that the bank doesn’t check endorsements or names on the check if the amount is under $10,000. The volume of checks is just too high for them to watch. Banks also put on the back of your bank statement that you have 60 days from the date of the statement to resolve any discrepancy, otherwise the bank is not responsible.

So imagine taking a valid vendor name – say ABC Pest Control – that your organization would spend money on and changing the address on the payment to your own PO Box. And if you have already succeeded depositing checks under ABC Enterprises, the bank will take it. You will enjoy the money, and your organization probably won’t know the difference.

Personal Purchases

Whether personal purchases are considered fraud by an organization depends on the type of organization. In the corporate environment, use of the company credit card to buy golf equipment while entertaining clients could be perfectly valid.

In government, we never entertain! OK, we seldom entertain, but governments would seldom find the purchase of golf equipment valid. Remember our discussion about what fraud is, what abuse is, and whether something is worthy of the attention of those in charge of governance? That applies to personal purchases, big time.

But HP wasn’t as lenient with their money as some other corporations. They ousted their CEO, Mark Hurd, in 2010 for expense report irregularities and for hiring a model/actress that he had a personal relationship with to represent HP at trade shows for $5000 to $10,000 a pop.[3]

Payroll Schemes

Another way employees can extract money from their employers using a false disbursement scheme is to make false claims for compensation. The fraud tree is divided into four parts under payroll schemes:

Ghost employees

Commission schemes

Workers compensation

Falsified wages

Ghost Employees

In this scheme, the government is charged for employee wages for fake employees or, if you prefer, “phantom” employees.

Do you remember Paul Bremer? He was the administrator of the Coalition Provisional Authority (CPA), the transitional Iraqi government. In 2007, Bremer acknowledged to the House Committee on Oversight and Government Reform that during the 2003 to 2004 rebuilding of Iraq, for which he was responsible, America had paid nonexistent “ghost employees.”

Bremer suggested that the organization feared the consequences of stopping payments to determine who were truly employed. Those who were employed supplied the Iraqi ministries with security, and Bremer did not want to anger these 74,000 armed men.

The problem of the “ghost” employees was just one piece of the puzzle of the missing $8.8 billion that the CPA distributed to Iraqi ministries. Stuart Bowen, the Special Inspector General for Iraq Reconstruction stated that the problem was not a major reason that so much money was unaccounted for. He blamed the lack of transparency for the missing funds.[4]

Commission Schemes

The Pyramid

Although I can’t imagine this happening in government, or that a commission/pyramid would be relevant in government, you may have personally been the victim of a pyramid scheme in your past. In a pyramid scheme, the fraudster promises consumers or investors large profits if they can recruit others to join the program. Some schemes purport to sell a product, but the product is really just a cover for the pyramid.

Victims of a pyramid scheme are often asked to inventory load – or buy stock inventory of a product in order to sell. In this way, the company does make profit, and the folks on the top of the pyramid profit, but the front-line salesmen are stuck with a bunch of inventory they can’t sell!

Also beware of claims that the product is selling like hotcakes! Who is buying the hotcakes: actual customers or just players in the pyramid?[5]

A few cautions about marketing ‘spin’!

I remember my mother buying a horrible car – a Ford Taurus – in the 90s because the dealer told her it was the best selling car in America. Yes, it was, but only because Ford made incredible deals to get the rental car industry to buy beaucoup of them. Consumers hated the car and for good reason. Ah, marketing spin wins again!

A well known vitamin company in the US is advertising that they are the first vitamin company to get clearance from an organization they say is an independent evaluator of vitamin quality. Only problem is that the vitamin company founded, funds, and shares staff with this independent evaluator.

And it isn’t just creative Americans: Customer complaints against four of the United Kingdom’s largest energy firms led to an investigation of nPower, Scottish Power, Scottish and Southern Energy, and EDF Energy by the energy regulator Ofgem.

Many of the complaints were against door-to-door salespeople and telemarketers who were persuading customers to switch suppliers. Customers were given misleading information and quotes, which resulted in the customers being in worse positions than before switching suppliers.

Confirming the customer complaints, Ofgem’s 2008 investigation showed that changing firms at the persuasion of pushy door salespeople left almost half of gas customers and electricity customers worse off.

As of September 2010, energy regulators were considering fining suppliers a portion of their annual revenue if customer complaints proved true.[6]

A bit about the the Ponzi

Although a Ponzi scheme is not specifically mentioned on the fraud tree, it is definitely worth talking about! A Ponzi scheme is similar to a pyramid scheme, except there is no product to sell, and the schemer doesn’t pay a commission to salespeople to find new recruits. A Ponzi schemer uses the money from new recruits to pay existing members.

The most notorious Ponzi schemer of our day is Bernie Madoff who defrauded investors out of $60 billion. Madoff paid investors significant returns using money he collected from new investors, which he never truly invested.

Enticing new investors by paying his investors more money allowed Madoff to keep the scheme rolling for about two, maybe three, decades. Madoff told investors that their investments were earning high returns and would give them large payouts to keep them onboard.

While he probably believed that his venture could last forever, it couldn’t withstand the decline of the stock market. In 2008, he could no longer keep up his lie. Investors weren’t paid on time because of his inability to yield sufficient cash out of his holdings.

On March 10, 2009, Bernie Madoff was charged with eleven felony charges including securities fraud, investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, false filings with the United States Securities and Exchange Commission (“SEC”), and theft from an employee benefit plan. On June 29, 2009, Madoff was sentenced to 150 years in prison.[7]

Workers Compensation

I like to work, don’t you? I like to get something done and create new things. But not everyone is motivated to create – some people think the world owes them a living, and false workers comp claims are an easy route to income without exertion.

It makes me very sad to see a video on 60 minutes of a guy moving a piano who has been claiming workers comp for three years. Can you imagine being related to that guy? How could he, and you, stand it?

Here is an executive summary from a report by the GAO on fraudulent benefits:

Social Security Administration: Cases of Federal Employees and Transportation Drivers and Owners Who Fraudulently and/or Improperly Received SSA Benefits[8]

Summary

This testimony discusses the results of our investigation of the disability programs managed by the Social Security Administration (SSA). SSA administers two of the nation’s largest cash benefit programs for people with disabilities: the Disability Insurance (DI) program, which provides benefits to workers with disabilities and their family members, and the Supplemental Security Income (SSI) program, which provides income for aged, blind, or disabled people with limited income and resources.

In 2008, the DI program provided about $104 billion to some 9 million beneficiaries, and the SSI program provided about $38 billion in financial benefits to some 7.5 million recipients. Given the magnitude of these cash benefit payments, it is important for SSA to have effective fraud prevention controls in place to minimize fraudulent and improper payments.

This statement summarizes our most recent report, describing cases of federal workers, commercial drivers, and commercial vehicle company owners who fraudulently or improperly received disability benefits. The objectives of the investigation were to (1) determine whether federal employees and commercial vehicle drivers and company owners may be improperly receiving disability benefits and (2) develop case study examples of individuals who fraudulently and/or improperly received these benefits. In conducting this investigation, we compared DI and SSI benefit data to civilian payroll records of certain federal agencies and carrier/driver records from the Department of Transportation (DOT) and 12 selected states.

We found the following:

1) Thousands of federal employees, commercial drivers, and owners of commercial vehicle companies received Social Security disability benefits during fiscal year 2008, though we could not determine the extent to which beneficiaries improperly or fraudulently received payments. Because further investigation is required to determine whether these individuals are entitled to receive payments, our analysis provides only an indicator of potentially improper or fraudulent activity. Federal salary data from selected agencies for October 2006 through December 2008 show that about 1,500 federal employees may be improperly receiving payments. These employees were (1) DI beneficiaries who received federal salary above the earnings threshold for more than 12 months after the start date of their disabilities or (2) SSI recipients who received more than 2 months of federal salary above the maximum SSA earnings threshold for the SSI program after the start date of their disabilities. Based on their SSA benefit amounts, we estimate that these federal employees received about $1.7 million in benefits a month.

2) Based on our overall analysis above, we selected 20 nonrepresentative examples of federal employees, commercial drivers, and registrants of commercial vehicle companies who received disability payments fraudulently and/or improperly. The 20 cases were primarily selected based on our analysis of SSA electronic and paper files for the higher overpayment amounts, the types of employment, and the locations of employment, and thus they cannot be projected to other federal employees, commercial drivers, or commercial vehicle owners who received SSA disability payments. In each case, SSA’s internal controls did not prevent improper and fraudulent payments, and as a result, tens of thousands of dollars of overpayments were made to individuals for 18 of these 20 cases. For the 20 cases, our investigations found the following: (1) For five cases, we believe that there is sufficient evidence that the beneficiaries committed fraud to obtain or continue receiving Social Security disability payments by withholding employment information. (2) For 10 cases, SSA improperly increased the benefit amounts of the disability payments because the individuals had increases in the reported wages on which the disability benefit payments are based.

(3) Several individuals from our cases were placed in long-term, interest-free repayment plans for improperly accepting disability overpayments, even though SSA can charge interest. One individual’s $33,000 repayment plan was in $20 monthly installments–resulting in a repayment period of 130 years. For 10 cases, the individuals were continuing to receive disability benefits as of October 2009. For 18 of these 20 cases, the individuals also received $250 stimulus checks as part of the American Recovery and Reinvestment Act of 2009 (Recovery Act) while they were improperly receiving SSA disability payments. According to SSA officials, most of these individuals were entitled to and would have received the $250 stimulus checks even if SSA had properly suspended the disability payments to them. Specifically, SSA officials stated that beneficiaries covered under the DI program would have been covered under an extended period of eligibility (EPE), which is a 36-month period in which SSA does not pay any benefit amounts (i.e., payments are suspended) if the beneficiary has earnings above the substantial gainful activity (SGA) threshold. According to SSA officials, all working DI beneficiaries covered by an EPE received the $250 stimulus check.

Falsified Wages

Here is a report from the NY Attorney General regarding contractors who falsified employee wages:

Three Contractors Arrested For Underpaying Employees And Falsifying Business Records In Connection With New York City Housing Authority Construction Projects[9]

State Attorney General Spitzer and New York City Department of Investigation Commissioner Rose Gill Hearn today announced that three construction contractors were arraigned on felony and misdemeanor charges arising out of their falsification of records that made it appear that $367,000 in legally required prevailing wages were paid to 19 workers on New York City Housing Authority projects, when, in fact, such wages were not paid.

Mohammed Abdur Rashid, and his company Columbus General Construction Inc., and Tarcisio Ferreira and Harrison Jarvis, whose construction companies are now defunct, were charged with failure to pay wages, falsification of business records, false filings and perjury in connection with Housing Authority contracts at the Edgemere and Arverne Houses (Ocean Bay) located in Far Rockaway.

The defendants entered “not guilty” pleas in Queens County Criminal Court, and were ordered to return to court on October 15, 2003.

“The message is clear: falsifying records and failing to pay the prevailing wages on a public work project are serious violations of the law. Contractors who engage in such tactics can expect criminal sanctions,” Spitzer said.

“These contractors unjustly chose to enrich themselves rather than pay employees their rightful wages. DOI will not tolerate this type of fraud or other acts of dishonesty and will investigate them with vigor. Upon recovering any improprieties, DOI will seek to prevent the company in question from obtaining future contracts with the City,” said Commissioner Gill Hearn.

The joint investigation by the Attorney General’s office and the Department of Investigation’s Office of the Inspector General for the Housing Authority revealed that between July 2, 2001 and December 31, 2002, Rashid, Ferreira, Jarvis, and their respective companies employed nineteen workers at the Edgemere and Arverne Houses. The work was subject to federal and state prevailing wage laws, which dictate the hourly rates that must be paid to employees working on public projects. In each case, the defendants are alleged to have failed to pay workers prevailing wages, and attempted to conceal their wrongdoing by filing false payroll showing that their employees were paid properly. The workers received between $70 to (sic) $110 per day instead of up to $48.53 per hour, which they were entitled to by law.

The Attorney General is also seeking restitution for the underpayment of wages to employees, which totals more than $367,000.

As a result of the continuing cooperation between the OAG and DOI, over one million dollars in wage restitution orders have already been obtained this year.

…

Next time… more on fraudulent disbursement schemes including expense reimbursement schemes.

[1] Andrea Ball. “Woman who stole from nonprofit up for parole two years into 25-year sentence.” Austin American Statesman. May 14, 2013.

[9] New York. Office of the Attorney General. Three Contractors Arrested For Underpaying Employees And Falsifying Business Records In Connection With New York City Housing Authority Construction Projects. Media Center. September 2003.

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